-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jh4WoQnEUF18UZY4q9Tl25Q1WsuG8YxUKAUeWOwGxgVEKQZTi1bCSVInVLhp9Ohd dfzzu7oV1TKb9P9tV3d8MA== 0000721161-97-000006.txt : 19970401 0000721161-97-000006.hdr.sgml : 19970401 ACCESSION NUMBER: 0000721161-97-000006 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SJNB FINANCIAL CORP CENTRAL INDEX KEY: 0000721161 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770058227 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-11771 FILM NUMBER: 97568370 BUSINESS ADDRESS: STREET 1: ONE N MARKET ST CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089477562 MAIL ADDRESS: STREET 1: ONE NORTH MARKET STREET CITY: SAN JOSE STATE: CA ZIP: 95113 10KSB/A 1 10KSB/A - ITEM 7 ADMENDMENT U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB-A (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year ended December 31, 1996 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from ______________________to ________________________ Commission File Number 0-11771 SJNB Financial Corp. - -------------------------------------------------------------------------------- (Name of small business issuer in its charter) California 77-0058227 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (408) 947-7562 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value - -------------------------------------------------------------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $25,374,000 The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on a market value of $20.375 per share (the closing price of the Common Stock), as of February 5, 1997) was $45,265,294. Number of shares of common stock outstanding as of February 5, 1997: 2,580,182 shares Documents incorporated by reference: Portions of registrant's definitive proxy statement for Registrant's 1996 Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A) are incorporated by reference into Part III of this Report. Transitional small business disclosure format: Yes No X ITEM 7: FINANCIAL STATEMENTS The following section includes the Company's Consolidated Financial Statements: Independent Auditors' Report Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Income for the Years Ended December 31, 1996 and 1995 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 Notes to Consolidated Financial Statements. Independent Auditors' Report The Board of Directors SJNB Financial Corp.: We have audited the accompanying consolidated balance sheets of SJNB Financial Corp. and subsidiary (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SJNB Financial Corp. and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP San Jose, California January 14, 1997
- ----------------------------------------------------------------------------------------------- SJNB Financial Corp. and subsidiary Consolidated Balance Sheets December 31, 1996 and 1995 (in thousands) - ----------------------------------------------------------------------------------------------- Assets 1996 1995 - ----------------------------------------------------------------------------------------------- Cash and due from banks $20,208 $12,574 Money market investments 19,800 3,200 Investment securities: Available for sale 48,044 42,542 Held to maturity (Fair value: $15,231 at December 31, 1996 and $15,492 at December 31, 1995) 15,072 15,248 - ----------------------------------------------------------------------------------------------- Total investment securities 63,116 57,790 - ----------------------------------------------------------------------------------------------- Loans 198,627 170,800 Allowance for possible loan losses (4,005) (3,847) - ----------------------------------------------------------------------------------------------- Loans, net 194,622 166,953 - ----------------------------------------------------------------------------------------------- Premises and equipment, net 4,001 3,494 Other real estate owned 454 664 Accrued interest receivable and other assets 2,737 2,764 Intangibles, net of accumulated amortization of $1,234 at December 31, 1996 and $735 at December 31, 1995 4,465 4,756 - ---------------------------------------------------------------------------------------------- Total $309,403 $252,195 =============================================================================================== Liabilities and Shareholders' Equity - ----------------------------------------------------------------------------------------------- Deposits: Non-interest-bearing $80,774 $52,775 Interest-bearing 163,865 143,917 - ----------------------------------------------------------------------------------------------- Total deposits 244,639 196,692 - ----------------------------------------------------------------------------------------------- Other short-term borrowings 29,688 24,000 Accrued interest payable and other liabilities 3,871 4,845 - ----------------------------------------------------------------------------------------------- Total liabilities 278,198 225,537 - ----------------------------------------------------------------------------------------------- Shareholders' equity: Common stock, no par value; authorized, 20,000 shares; issued and outstanding, 2,571 shares in 1996 and 2,418 shares in 1995 20,880 19,627 Retained earnings 10,263 6,798 Net unrealized gain on securities available for sale 62 233 - ----------------------------------------------------------------------------------------------- Total shareholders' equity 31,205 26,658 - ----------------------------------------------------------------------------------------------- Commitments and contingencies ---- ---- - ----------------------------------------------------------------------------------------------- Total $309,403 $252,195 =============================================================================================== See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------------------------- SJNB Financial Corp. and subsidiary Consolidated Statements of Income For the years ended December 31, 1996 and 1995 - --------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1996 1995 - --------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $20,422 $18,016 Interest on money market investments 258 280 Interest and dividends on investment securities available for sale 2,907 1,847 Interest on investment securities held to maturity 949 878 Other interest and investment income (9) (43) - --------------------------------------------------------------------------------------------------- Total interest income 24,527 20,978 - --------------------------------------------------------------------------------------------------- Interest expense: Interest expense on interest-bearing deposits: Certificates of deposit of $100 or more 2,608 2,232 Other 5,451 4,451 - --------------------------------------------------------------------------------------------------- Total interest expense 8,059 6,683 - --------------------------------------------------------------------------------------------------- Net interest income 16,468 14,295 - --------------------------------------------------------------------------------------------------- Provision for possible loan losses 190 1,045 - --------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 16,278 13,250 - --------------------------------------------------------------------------------------------------- Other income: Service charges on deposits 551 553 Other operating income 437 456 Net loss on sale of securities available for sale (142) (43) - --------------------------------------------------------------------------------------------------- Total other income 846 966 - --------------------------------------------------------------------------------------------------- Other expenses: Salaries and benefits 5,517 4,339 Occupancy 702 740 Other 3,416 3,718 - --------------------------------------------------------------------------------------------------- Total other expenses 9,635 8,797 - --------------------------------------------------------------------------------------------------- Income before income taxes 7,489 5,419 Income taxes 3,198 2,395 - --------------------------------------------------------------------------------------------------- Net income $4,291 $3,024 =================================================================================================== Net income per share $1.63 $1.20 =================================================================================================== Average common share equivalents outstanding 2,640 2,522 =================================================================================================== See accompanying Notes to Consolidated Financial Statements.
- ---------------------------------------------------------------------------------------------------------------------------- SJNB Financial Corp. and subsidiary Consolidated Statements of Shareholders' Equity For the years ended December 31, 1996 and 1995 - ---------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gain (Loss) Total on Securities Share- Common Retained Available holders' (in thousands, except per share amounts) Shares Stock Earnings for Sale Equity - ---------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1994 2,363 $19,421 $4,278 $(257) $23,442 Stock options exercised 71 351 ---- ---- 351 Common stock repurchase (16) (145) ---- ---- (145) Cash dividends ($.21 per share) ---- ---- (504) ---- (504) Net income for the year ended December 31, 1995 ---- ---- 3,024 ---- 3,024 Net unrealized gain on securities available for sale ---- ---- ---- 490 490 - ---------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1995 2,418 19,627 6,798 233 26,658 - ---------------------------------------------------------------------------------------------------------------------------- Stock options exercised 153 810 ---- ---- 810 Tax benefit from stock options exercised ---- 443 ---- ---- 443 Cash dividends ($.33 per share) ---- ---- (826) ---- (826) Net income for the year ended December 31, 1996 ---- ---- 4,291 ---- 4,291 Net unrealized loss on securities available for sale ---- ---- ---- (171) (171) - ---------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 2,571 $20,880 $10,263 $62 $31,205 ============================================================================================================================ See accompanying Notes to Consolidated Financial Statements.
- ---------------------------------------------------------------------------------------------------------------------------- SJNB Financial Corp. and subsidiary Consolidated Statements of Cash Flows For the years ended December 31, 1996 and 1995 - ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $4,291 $3,024 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 190 1,045 Depreciation and amortization 483 424 Amortization of intangibles 499 569 Deferred tax (benefit) ----- (86) Loss on sale of securities available for sale 142 43 Write down of other real estate owned ----- ----- Net (gain) loss on sale of other real estate owned (46) 19 Amortization of premium on investment securities, net 36 (129) Decrease in intangible assets 200 (412) Decrease in accrued interest receivable and other assets 120 418 Increase (decrease) in accrued interest payable and other liabilities (1,388) 2,470 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,527 7,385 - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sale or maturities of securities available for sale 22,751 14,162 Maturities of securities held to maturity 5,345 425 Purchase of securities available for sale (28,784) (37,148) Purchase of securities to be held until maturity (5,101) (1,762) Proceeds from the sale of other real estate owned 406 1,761 Loans, net (27,333) (22,851) Capital expenditures (989) (896) Cash used to acquire Astra Financial Corp. (650) ----- - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (34,355) (46,309) - ---------------------------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Deposits, net 47,947 16,405 Other short-term borrowings 5,688 24,000 Cash dividends (826) (504) Tax benefit from stock options exercised 443 ----- Common stock repurchased ----- (145) Proceeds from stock options exercised 810 351 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 54,062 40,107 - ---------------------------------------------------------------------------------------------------------------------------- Net increase in cash and equivalents 24,234 1,183 Cash and equivalents at beginning of year 15,774 14,591 - ---------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $40,008 $15,774 ============================================================================================================================
- -------------------------------------------------------------------------------- SJNB Financial Corp. and subsidiary Consolidated Statements of Cash Flows For the years ended December 31, 1996 and 1995 - -------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------- Other cash flow information: Interest paid $8,012 $6,388 Income taxes paid $4,111 $1,185 ================================================================================ Noncash transactions: Transfer of loans to other real estate owned $150 $950 ================================================================================ Purchase of Astra Financial's assets at fair value: Loans $676 ----- Intangible assets 408 ----- Other assets 93 ----- - -------------------------------------------------------------------------------- Fair value of assets acquired 1,177 ----- Liabilities assumed: Other liabilities 527 ----- - -------------------------------------------------------------------------------- Total liabilities assumed 527 ----- - -------------------------------------------------------------------------------- Cash used to acquire Astra Financial Corp. $650 ----- ================================================================================ See accompanying Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements December 31, 1996 and 1995 NOTE 1 - Summary of Significant Accounting Policies SJNB Financial Corp. ("Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on April 18, 1983. Its principal office is located at One North Market Street, San Jose, California. The Company owns 100% of the issued and outstanding common shares of San Jose National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was incorporated on November 23, 1981 and commenced business in San Jose, California on June 10, 1982. Its main office is located at One North Market Street, San Jose, California. SJNB engages in the general commercial banking business with special emphasis on the banking needs of the business and professional communities in San Jose and the surrounding areas. The Financial Services Division is located at 95 South Market, San Jose California, where it engages in the factoring of accounts receivable. The accounting policies of SJNB Financial Corp. and San Jose National Bank (collectively, the "Company") are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. a. Consolidation The consolidated financial statements include the accounts of SJNB Financial Corp. and its wholly-owned subsidiary, San Jose National Bank (the "Bank"). All material intercompany accounts and transactions have been eliminated in the consolidated financial statements. b. Investment Securities The Company accounts for its investment securities as follows: Available for sale-Investment securities that are acquired without the intent to hold until maturity are classified as available for sale. Such securities are valued at market value. Market value adjustments are reported as a separate component of shareholders' equity until realized. Held to maturity-Investment securities purchased with the intent and ability to hold them until maturity are classified as held to maturity. Such securities are carried at cost, adjusted for accretion of discounts and amortization of premiums. Investment securities purchased are recorded as of their trade date. Accretion of discounts and amortization of premiums arising at acquisition are included in income using methods approximating the interest method. Gains or losses on sales of securities, if any, are determined based on the specific identification method. c. Loans and Allowance for Possible Loan Losses Loans generally are stated at the principal amount outstanding. Interest on loans is credited to income on a simple interest basis. Loan origination fees and direct origination costs are deferred and amortized to income by a method approximating the level yield method over the estimated lives of the underlying loans. The accrual of interest on loans is discontinued and any accrued and unpaid interest is reversed when, in the opinion of management, there is significant doubt as to the collectibility of interest or principal or when the payment of principal or interest is ninety days past due, unless the amount is well-secured and in the process of collection. The allowance for possible loan losses is a valuation allowance maintained to provide for future loan losses through charges to current operating expense. The allowance is based upon a continuing review of loans by management which includes consideration of changes in the character of the loan portfolio, current and anticipated economic conditions, past lending experience and such other factors which, in management's judgment, deserve recognition in estimating potential loan losses. In addition, regulatory examiners may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. Impaired loans are those in which based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. The Company measures such loans based on the present value of future cash flows discounted at the loan's effective interest rate, or at the loan's market value or the fair value of collateral if the loan is secured. If the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. d. Sales of Loans When loans or participating interests in loans are sold without recourse, gains and losses are recognized at the time of sale. Gains or losses recognized are equal to the premium less estimated future servicing costs and profits. Any premiums or discounts related to loan sales are amortized on a basis that approximates the effective yield over the estimated remaining life of the loan. e. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are charged to expense over the estimated useful lives of the assets on a straight-line basis as follows: Buildings 30 years Furniture and equipment 3-10 years Improvements 7-15 years f. Other Real Estate Owned Other real estate owned is comprised of real estate acquired through foreclosure. Such foreclosures are initially recorded at the lower of cost or fair value. Subsequent valuation adjustments are made if estimated selling costs and the fair value falls below the carrying amount. Holding costs are expensed as incurred. g. Intangibles Goodwill is being amortized using the straight-line method over 15 years. Core deposit intangibles are amortized using an accelerated method over ten years. On a periodic basis, the Company reviews its intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable. Should such a change indicate that the value of such intangibles may be impaired, an evaluation of the recoverability would be performed prior to any writedown of the assets. h. Interest Rate Instruments Interest rate instruments are entered into in conjunction with the Bank's asset/liability management. As these contracts are entered into only after meeting the accounting criteria for a hedge, and as long as they continue to meet such criteria, changes in market value are deferred and the net settlements are accrued as adjustments to interest income. The Bank currently has outstanding an interest rate floor arrangement which does not meet the accounting criteria for a hedge and which therefore is accounted for on a mark to market basis. i. Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Under the asset and liability method, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and then a valuation allowance is established to reduce that deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized. j. Net Income Per Share Net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year plus shares issuable assuming exercise of all employee stock options, except where anti-dilutive. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. k. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and money market investments. l. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent asset and liabilities to prepare these financial statement in conformity with generally accepted accounting principles. Actual results could differ from those estimates. m. Impairment of Long-Lived Assets Long-lived assets and certain identifiable intangibles held and used by an entity are reviewed for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. The Company has not identified any long-lived assets or identifiable intangibles which were impaired. n. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in 1996 and is effective for years ending after December 31, 1996. The Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under this approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The Company does not believe this Statement will have any significant impact on its consolidated financial statements. NOTE 2 - Acquisition On January 2, 1996 the Company acquired Astra Financial Inc. (Astra) which was accounted for as a purchase transaction. Astra is an asset based lending company based in San Jose, California. Its outstanding factoring receivables were approximately $2.2 million as of December 31, 1995. The purchase price of Astra was approximately $760. NOTE 3 - Cash and Due from Banks The Federal Reserve requires the Bank to maintain average reserve balances for certain deposit balances. Such required reserves were approximately $4.1 million and $2.0 million as of December 31, 1996 and 1995, respectively.
NOTE 4 - Investment Securities Investment securities as of December 31, 1996 and 1995 are summarized as follows: (dollars in thousands) December 31, 1996 - ---------------------------------------------------------------------------------------------------------------------------- Unrealized Fair ----------------------------------- Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Treasury $3,989 $19 ($3) $4,005 U. S. Government Agencies 34,099 188 (2) 34,285 Mortgage Backed 5,835 55 (22) 5,868 Mutual funds 4,018 ----- (132) 3,886 - ---------------------------------------------------------------------------------------------------------------------------- Total available for sale 47,941 262 (159) 48,044 - ---------------------------------------------------------------------------------------------------------------------------- Held to Maturity: U.S. Treasury 1,975 28 ----- 2,003 U.S. Government agencies 7,463 78 (18) 7,523 State and municipal (nontaxable) 2,635 20 (2) 2,653 Mortgage Backed 2,481 53 ----- 2,534 - ---------------------------------------------------------------------------------------------------------------------------- Total held to maturity 14,554 179 (20) 14,713 Federal Reserve Bank Stock 518 ----- ----- 518 - ---------------------------------------------------------------------------------------------------------------------------- Total 15,072 179 (20) 15,231 ============================================================================================================================ Total investment securities portfolio $63,013 $441 $(179) $63,275 ============================================================================================================================ December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Treasury $3,998 $59 ----- $4,057 U. S. Government Agencies 34,129 450 (1) 34,578 Mortgage Backed 9 ----- ----- 9 Mutual funds 4,018 ----- (120) 3,898 - ---------------------------------------------------------------------------------------------------------------------------- Total available for sale 42,154 509 (121) 42,542 - ---------------------------------------------------------------------------------------------------------------------------- Held to Maturity: U.S. Treasury 4,265 39 (11) 4,293 U.S. Government agencies 4,976 101 (25) 5,052 State and municipal (nontaxable) 3,060 26 (2) 3,084 Mortgage Backed 2,428 116 ----- 2,544 - ---------------------------------------------------------------------------------------------------------------------------- Total held to maturity 14,729 282 (38) 14,973 Federal Reserve Bank Stock 519 ----- ----- 519 - ---------------------------------------------------------------------------------------------------------------------------- Total 15,248 282 (38) 15,492 ============================================================================================================================ Total investment securities portfolio $57,402 $791 $(159) $58,034 ============================================================================================================================
As of December 31, 1996 and 1995 investment securities with carrying values of approximately $38 million and $49 million, respectively, were pledged as collateral for deposits of public funds and other purposes. Investment in Federal Reserve Bank stock is carried at cost, which is approximately equal to its market value.
The following tables provide the scheduled maturities of the Company's investment securities portfolio as of December 31, 1996 and 1995: (dollars in thousands) December 31, 1996 December 31, 1995 ---------------------------------------------------------------------- Amortized Fair Amortized Fair Securities available for sale Cost Value Cost Value ---------------------------------------------------------------------- Due in one year or less $12,125 $12,147 $10,021 $10,079 Due after one year through five years 31,798 32,005 28,106 28,556 Due after ten years 0 6 9 9 ---------------------------------------------------------------------- Total 43,923 44,158 38,136 38,644 ---------------------------------------------------------------------- Securities held to maturity Due in one year or less 2,250 2,277 5,605 5,587 Due after one year through five years 9,822 10,420 6,696 6,842 Due after ten years 2,481 2,534 2,428 2,544 ---------------------------------------------------------------------- Total 14,553 15,231 14,729 14,973 ---------------------------------------------------------------------- Non-maturity investments Available for sale - Mutual Funds 4,018 3,886 4,018 3,898 Held to maturity - FRB Stock 519 519 519 519 ---------------------------------------------------------------------- Total 4,537 4,405 4,537 4,417 ---------------------------------------------------------------------- Total Investment securities $63,013 $63,794 $57,402 $58,034 ======================================================================
Mutual funds consist of several funds invested in U. S. Government securities and government issued adjustable rate mortgages (ARMS). Interest income earned on U. S. Treasury, U. S. Government agencies and state and municipal securities for the years ended December 31, 1996 and 1995 are as follows: - --------------------------------------------------------- Interest income (dollars in thousands) 1996 1995 - --------------------------------------------------------- Securities available for sale: U.S. Treasury $291 $417 U.S. Government agencies 2,088 1,200 Mortgage Backed 311 (3) Mutual funds 217 233 Securities held to maturity: U.S. Treasury 168 214 U.S. Government agencies 408 306 State and municipal 136 120 (nontaxable) Mortgage Backed 206 208 Federal Reserve Bank 31 30 - --------------------------------------------------------- Interest income $3,856 $2,725 ========================================================= NOTE 5 - Loans A summary of loans as of December 31, 1996 and 1995 is as follows: (dollars in thousands) 1996 1995 - --------------------------------------------------------- Commercial $77,335 $52,958 Real estate construction 15,451 14,488 Real estate-other 74,713 74,045 Consumer 8,622 8,800 Other 23,174 21,302 Unearned fee income (668) (793) - --------------------------------------------------------- Total loan portfolio 198,627 170,800 Less allowance for possible (4,005) (3,847) loan losses - --------------------------------------------------------- Loans, net $194,622 $166,953 ========================================================= Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified loan portfolio, a substantial portion of its customers' ability to honor contracts is reliant upon the economic stability of the Santa Clara Valley, which in some degree relies on the stability of high technology companies in its "Silicon Valley." Loans are generally made on the basis of a secure repayment source, which is based on a detailed cash flow analysis; however, collateral is generally a secondary source for loan qualification. Approximately 40% of the Company's loan portfolio is made up of real estate other than construction. This category of real estate loans includes loans on income-bearing commercial properties. In addition, 9.0% of the loan portfolio is made up of real estate construction loans. These loans consist of approximately 61% residential and 39% commercial. Included in Consumer loans are prime equity loans of $4.5 million or approximately 2.3% of the total loan portfolio. Included in the category "Other" are loans to real estate developers for short-term investment purposes and loans to nondevelopers for real estate investment purposes that amount to approximately 6.3% of the total loan portfolio. This amounts to approximately 54% of the loan portfolio which is directly related to real estate or real estate interests. Approximately 38% of the total loan portfolio is commercial loans; however, no particular industry represents a significant portion of such loans. The following is an analysis of the allowance for possible loan losses for the years ended December 31, 1996 and 1995: (dollars in thousands) 1996 1995 - ----------------------------------------------------------- Balance, beginning of year $3,847 $3,311 Provision for possible loan losses 190 1,045 Charge-offs (418) (696) Recoveries 336 187 Allowance relating to the acquisition of Astra Financial Corp. 50 ---- - ----------------------------------------------------------- Balance, end of year $4,005 $3,847 =========================================================== At December 31, 1996, impaired loans totaled $540 with a corresponding valuation allowance of $37. For the year ended December 31, 1996, the average recorded investment in impaired loans was approximately $600. The Company recognized $46 of interest on impaired loans (during the portion of the year they were impaired), of which $39 related to impaired loans for which interest income is recognized on the cash basis. The balance of nonaccrual loans as of December 31, 1996 and 1995 was approximately $457 and $894, respectively. The effect on interest income had these loans been performing in accordance with contractual terms was $35 in 1996 and $111 in 1995. Income actually recognized on these loans was $29 in 1996 and $11 in 1995. The Company has made loans to executive officers, directors and their affiliates in the ordinary course of business. An analysis of activity with respect to such loans during the years ended December 31, 1996 and 1995 is as follows: (dollars in thousands) 1996 1995 - ----------------------------------------------------------- Balance, beginning of year $1,466 $3,854 New loans disbursed 634 471 Repayments of loans (448) (2,859) - ----------------------------------------------------------- Balance, end of year $1,652 $1,466 =========================================================== As of December 31, 1996, loans of approximately $12 million were pledged as collateral for the Federal Reserve Discount Window. The Bank did not utilize the Discount Window for any borrowings during 1996. NOTE 6 - Premises and Equipment A summary of premises and equipment as of December 31, 1996 and 1995 is as follows: (dollars in thousands) 1996 1995 - ----------------------------------------------------------- Land $829 $829 Buildings and improvements 3,880 3,312 Furniture and equipment 2,639 2,258 - ----------------------------------------------------------- Premises and equipment 7,348 6,399 Less accumulated depreciation and (3,347) (2,905) amortization - ----------------------------------------------------------- Premises and equipment, net $4,001 $3,494 =========================================================== NOTE 7 - Time Deposits As of December 31, 1996 and 1995, the Bank had $48 and $43 million, respectively, in time deposits in denominations of $100 or more. Interest expense for these deposits was $2.6 million and $2.2 million in 1996 and 1995, respectively. NOTE 8 - Other Short-term Borrowings Other short-term borrowings include federal funds purchased and securities sold under agreements to repurchase and information relating to these borrowings are summarized below: (dollars in thousands) 1996 1995 - ------------------------------------------------------------------------ Federal funds purchased: Balance at December 31, ----- $2,000 Weighted average interest rate at year end ----- 5.25% Maximum amount outstanding at any month $5,000 9,000 end Average outstanding balance 813 355 Weighted average interest rate paid 5.70% 6.17% Securities sold under agreements to repurchase: Balance at December 31, $29,688 $22,000 Weighted average interest rate at year end 5.56% 5.77% Maximum amount outstanding at any month 30,067 23,553 end Average outstanding balance 23,161 10,827 Weighted average interest rate paid 5.58% 5.95% The Company's bank subsidiary has informal arrangements with various correspondents providing short-term credit for liquidity requirements; such informal lines aggregated $12 million at December 31, 1996. NOTE 9 - Income Taxes Income tax expense for the years ended December 31, 1996 and 1995 consists of the following: (dollars in thousands) 1996 1995 - ----------------------------------------------------------- Current: Federal $2,271 $2,108 State 806 373 - ----------------------------------------------------------- Total current 3,077 2,481 - ----------------------------------------------------------- Deferred: Federal 145 (81) State (24) (5) - ----------------------------------------------------------- Total deferred 121 (86) - ----------------------------------------------------------- Income taxes $3,198 $2,395 =========================================================== Total income tax expense differed from the amount computed by applying the U. S. federal income tax rates in years ended December 31, 1996 and 1995 of 34% to income before income taxes as a result of the following: (dollars in thousands) 1996 1995 - ----------------------------------------------------------- Computed "expected " tax expense $2,546 $1,842 California franchise tax, net of federal income tax 516 368 Amortization of intangible assets 167 230 Federal tax-exempt investment income (46) (42) Other 15 (3) - ----------------------------------------------------------- Income taxes $3,198 $2,395 =========================================================== The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995, are presented below: (dollars in thousands) 1996 1995 - ----------------------------------------------------------- Deferred tax assets: Provision for possible loan losses $1,157 $1,175 Purchase accounting adjustments 231 263 Foreclosure income 44 44 State taxes 224 181 Deferred compensation 95 59 General business credit 130 182 Net operating loss ----- 175 Other 95 ----- - ----------------------------------------------------------- Total gross deferred tax assets 1,976 2,079 - ----------------------------------------------------------- Deferred tax liabilities: Securities available for sale 41 155 Depreciation and amortization 125 69 Other ----- 38 - ----------------------------------------------------------- Total gross deferred tax liabilities 166 262 - ----------------------------------------------------------- Net deferred tax assets $1,810 $1,817 =========================================================== Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1995 are primarily as a result of adjustments to conform to tax returns as filed. Deferred tax assets related to purchase accounting adjustments include the tax effect of fair market value adjustments of the assets and liabilities of businesses acquired. The Company believes that the net deferred tax asset is realizable through sufficient taxable income within the carryback periods and the current year's taxable income. NOTE 10 - Detail of Other Expense Other expense for the years ended December 31, 1996 and 1995 consists of the following: (dollars in thousands) 1996 1995 - ----------------------------------------------------------- Data processing $554 $458 Amortization of core deposit intangibles and goodwill 499 569 Business promotion 370 314 Legal and professional fees 369 476 Client services 247 247 Advertising 242 186 Directors' fees and costs 219 239 Stationery and supplies 183 180 Loan and collection 151 215 Regulators' assessments 72 283 Net cost of other real estate owned (48) 45 Other 559 506 - ----------------------------------------------------------- Total $3,417 $3,718 =========================================================== NOTE 11 - Stock Option Plan During 1996 the shareholders of the Company approved the 1996 Stock Option Plan (the "Plan"), which replaced the existing two stock option plans. The 1996 Stock Option Plan is described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for its Plan. Had compensation cost for the Plan been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts for options granted for the years 1995 and 1996 indicated below: (dollars in thousands) 1996 1995 - --------------------------------------------------------- Net income: As reported $4,291 $3,024 Pro forma 3,845 2,842 - --------------------------------------------------------- Net income per share: As reported $1.63 $1.20 Pro forma 1.46 1.13 - --------------------------------------------------------- The above amounts include the impact on net income and net income per share for options granted during 1995 and 1996; such amounts would have been substantially different if options granted prior to 1995 had been included in the computation. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 1.9% and 1.6%; expected volatility of 50% and 55%; average risk-free interest rates of 6.3% and 6.5%; and expected lives of 8.2 years. The 1996 Stock Option Plan provides that either incentive stock options or nonstatutory stock options may be granted to certain key employees or directors to purchase authorized, but unissued, common stock of the Company. Shares may be purchased at a price not less than the fair market value of such stock on the date of the grant. All stock options become exercisable at least 40% one year after the date of grant and at least 20% in each of the following three years. They expire no later than ten years after the date of the grant. The Plan provides that outside directors will automatically receive a nonstatutory option covering 5,000 shares annually at an exercise price equal to 100% of the market price of the Common Stock on the date of grant. The 1996 Stock Option Plan replaced the previous two plans which had similar provisions. Any options granted under these plans which expire without being exercised, the corresponding common shares shall become available for awards under the Plan. The number of shares subject to outstanding options under these plans was 244,815 as of December 31, 1996. A prior plan expired during 1992 and the number of shares subject to outstanding options under the prior plan was 7,703 as of December 31, 1996. Activity under the stock plans is as follows: Weighted Number Average of Exercise Options Shares Price - ----------------------------------------------------------- Balances, December 31, 1994 260,471 $5.34 Granted 140,125 9.28 Cancelled (8,300) 8.08 Exercised (70,987) 5.14 - ----------------------------------------------------------- Balances, December 31, 1995 321,309 7.03 - ----------------------------------------------------------- Granted 93,560 16.48 Cancelled (9,640) 11.58 Exercised (152,711) 5.29 - ----------------------------------------------------------- Balances, December 31, 1996 252,518 $11.41 =========================================================== The weighted-average fair value of options granted during 1996 and 1995 was $6.22 and $4.32, respectively. The following table summarizes options outstanding and exercisable at December 31, 1996: - -------------------------------------------------------------------------------- Weighted Average Weighted Range of ----------------------- Average Exercise Shares Contractual Exercise Shares Exercise Price Outstanding Life Price Exercisable Price - -------------------------------------------------------------------------------- $4.25-8.37 43,293 5.63 $6.48 33,433 $6.13 9.12-9.31 117,940 8.56 9.31 43,000 9.31 11.50-14.31 12,825 9.09 13.39 770 11.87 16.37-19.94 78,460 9.49 16.96 ---- ---- ---------------------------------------------------------------- $4.25-19.94 252,518 8.37 $11.41 77,203 $7.96 ============== ============== NOTE 12 - Commitments and Contingent Liabilities In the normal course of business, there are outstanding commitments, such as commitments to extend credit, which are not reflected in the consolidated financial statements. These commitments involve, to varying degrees, credit risk in excess of the amount recognized as either an asset or liability in the consolidated balance sheet. The Company controls the credit risk through its credit approval process. The same credit policies are used when entering into such commitments. Management does not anticipate any loss from such commitments. As of December 31, 1996, amounts committed to extend credit under normal lending agreements aggregated approximately $77 million for undisbursed loan commitments and approximately $3.9 million for commitments under unused standby letters of credit and other guarantees. The Bank utilizes various financial instruments with off-balance sheet risk to reduce its exposure to fluctuations in interest rates. These financial instruments involve, to varying degrees, credit and interest rate risk in excess of the amount recognized as either an asset or liability in the statement of financial position. The credit risk is the possibility that a loss may occur because a party to a transaction failed to perform according to the terms of the contract. Interest rate risk is the possibility that future changes in market prices will cause a financial instrument to be less valuable or more onerous. The Bank attempts to control the credit risk arising from these instruments through its credit approval process and through the use of risk control limits and monitoring procedures. Interest rate risk is managed by various asset and liability methods including the utilization of interest rate hedging vehicles. Also at December 31, 1996, the Bank had outstanding an interest rate floor in the amount of $10 million for a period of five years. The Bank has paid a fixed premium for which it will receive, through May 10, 1999, the amount of interest on $10 million based on the difference of 7% and prime when prime is less than 7%. This will protect the Bank against decreases in its net income when prime decreases to less than 7%. The current fair market value of the floor is approximately $8. The Company is obligated under its lease agreement for 95 South Market under a noncancelable operating lease through September 2004. The lease is subject to periodic adjustment based on changes in the CPI. The following table shows future minimum payments under the lease as of December 31, 1996: - ---------------------------------------------------------- Year Ending (in thousands) December 31, 1997-2001 ($228 each year) $1,140 Thereafter 630 Total minimum lease payments $1,770 =========================================================== Total minimum lease payments to be received under noncancelable operating subleases at December 31, 1996 are approximately $1.4 million; these payments are not reflected in the above table. There is ordinary routine litigation incidental to the business pending against the Company but, in the opinion of management, liabilities (if any) arising from such claims will not have a material effect upon the consolidated financial statements of the Company. NOTE 13 - Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures about Fair Value of Financial Instruments," requires the Company disclosure of estimated fair values for its financial instruments. Fair value estimates, methods and assumptions, set forth below for the Company's financial instruments, are made solely to comply with the requirements of SFAS No. 107 and should be read in conjunction with the financial statements and notes in this Annual Report. Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for most of the Company's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of the values, and they are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the financial instruments, and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. The fair valuations have not been updated since year end; therefore, the valuations may have changed significantly since that point in time. The Company has not included certain material items in its disclosure, such as the value of the long-term relationships with the Company's deposit customers, since these intangibles are not financial instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following table presents a summary of the Company's financial instruments, as defined by SFAS No. 107 as of December 31, 1996: (dollars in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Financial assets: Value Value Value Value - ----------------------------------------------------------------------------------------------------------------- Cash and due from banks $20,208 20,208 $12,574 12,574 Money market investments 19,800 19,807 3,200 3,200 Investment securities 63,116 63,275 57,790 58,034 Loans, net 194,622 193,438 166,953 167,207 Accrued interest receivable 1,735 1,735 1,698 1,698 - ----------------------------------------------------------------------------------------------------------------- Financial liabilities: - ----------------------------------------------------------------------------------------------------------------- Deposits 245,213 245,348 197,189 197,102 Federal funds purchased, securities sold under repurchase agreements and other borrowings 30,286 30,318 24,714 24,672 - ----------------------------------------------------------------------------------------------------------------- Off-balance sheet Financial Instruments - ----------------------------------------------------------------------------------------------------------------- Interest rate floor contract purchased 22 8 31 64 - -----------------------------------------------------------------------------------------------------------------
The methodology and assumptions utilized to estimate the fair value of the Company's financial instruments, not previously discussed above, are described below: Financial instruments with fair value approximate to carrying value - The carrying value of cash and due from banks, money market investments, accrued interest receivable, noninterest-bearing demand accounts, interest-bearing checking, money market and savings deposit accounts, accrued interest receivable and expense approximates fair value due to the short-term nature of these financial instruments. Investment securities - The estimated fair values of securities by type are based on quoted market prices when available. Loans - The carrying amount of loans is net of unearned fee income and the reserve for possible loan losses. The fair valuation calculation process differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment estimates are evaluated by product and loan rate. Discount rates presented in the paragraphs below have a wide range due to the Company's mix of fixed and variable rate products. The fair value of loans is calculated by discounting contractual cash flows using discount rates that reflect the Company's current pricing for loans with similar characteristics and remaining maturity. Most of the discount rates applied to these loans are between 10.6% and 11.2% at December 31, 1996. Additionally, the allowance for loan losses was applied against the estimated fair value of loans to recognize future defaults of contractual cash flows. Fair value for nonperforming loans is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows, or underlying collateral values, where appropriate. Deposits -The fair value of certificates of deposit and other time deposits is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for like deposits with similar remaining maturities. Other short-term borrowings - A reasonable estimate of the fair value of federal funds sold is the carrying amount because of the relatively short period of time between the origination of the instrument and its expected maturity. The fair value of the Company's securities sold under repurchase agreements is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for such instruments with similar remaining maturities. Commitment to extend credit - The majority of the Company's commitments to extend credit carry variable and current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the table. Derivative financial instruments - The fair value of the interest rate floor generally reflects the estimated amounts the Company would receive based upon dealer quotes, to terminate such agreements at the reporting date. NOTE 14 - SJNB Financial Corp. (Parent Company Only) The following are the financial statements of SJNB Financial Corp. (parent company only): - -------------------------------------------------------------------------------- Balance Sheets December 31, 1996 and 1995 (dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------- Assets Cash and equivalents $1,050 $710 Investment in the Bank 30,061 25,889 Other assets 94 74 - -------------------------------------------------------------------------------- Total assets $31,205 $26,673 ================================================================================ Liabilities and Shareholders' Equity Total liabilities-Accounts payable ----- $15 - -------------------------------------------------------------------------------- Common stock, no par value; authorized, 20,000 shares issued and outstanding, 2,571 shares in 1996 and 2,418 shares in 1995 $20,880 19,627 Retained earnings 10,263 6,798 Net unrealized gain on securities available for sale 62 233 - -------------------------------------------------------------------------------- Total shareholders' equity 31,205 26,658 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $31,205 $26,673 ================================================================================ - -------------------------------------------------------------------------------- Statements of Income For the Years Ended December 31, 1996 and 1995 (dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------- Equity in undistributed income of the Bank $4,343 $3,010 Interest income and fees on loans 23 123 Reduction of provision for possible loan losses ----- 57 Other expense (110) (156) - -------------------------------------------------------------------------------- Income before taxes 4,256 3,034 Income (tax) benefit 35 (10) - -------------------------------------------------------------------------------- Net income $4,291 $3,024 ================================================================================ - -------------------------------------------------------------------------------- Statements of Cash Flows For the Years Ended December 31, 1996 and 1995 (dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $4,291 $3,024 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Recovery of provision for possible loan losses ---- (57) Increase in other assets (20) ---- Increase (decrease) in liabilities (15) 10 Equity in undistributed income of the Bank (4,343) (3,010) - -------------------------------------------------------------------------------- Net cash used in operating activities (87) (33) - -------------------------------------------------------------------------------- Cash flows from investing activities: Decrease in loans, net ---- 512 Cash dividend (826) (504) Common stock repurchased ---- (145) Stock options exercised 810 351 Tax benefit from stock options exercised 443 ---- - -------------------------------------------------------------------------------- Net cash provided by investing activities 427 214 - -------------------------------------------------------------------------------- Net increase in cash and equivalents 340 181 Cash and equivalents at beginning of year 710 529 - -------------------------------------------------------------------------------- Cash and equivalents at end of year $1,050 $710 ================================================================================ NOTE 15- Regulatory Matters The Federal Reserve Board, the Comptroller of the Currency and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common and qualifying preferred shareholders' equity, less certain intangibles and other adjustments. Tier 2 capital consists of subordinated and other qualifying debt, and the allowance for possible loan losses up to 1.25% of risk weighted assets. The total of Tier 1 and Tier 2 capital, less investments in unconsolidated subsidiaries, represents qualifying total capital, at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. The leverage capital ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum leverage capital ratio is 3%, most banking organizations are required to maintain leveraged capital ratios of at least 100 to 200 basis points above the 3%.
The table below summarizes the Tier 1 and total risk-based capital ratios and leverage capital ratios of the Company and the Bank as of the dates indicated: - ---------------------------------------------------------------------------------------------------------------------------- Risk-based and Leverage Capital Ratios (dollars in thousands) Company December 31, 1996 December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------------- Risk-based Amount Ratio Amount Ratio -------------------------------------------------------------- Tier 1 capital $26,533 11.91% $21,589 11.34% Tier 1 capital minimum requirement 8,910 4.00 7,617 4.00 - ---------------------------------------------------------------------------------------------------------------------------- Excess $17,623 7.91% $13,972 7.34% ============================================================================================================================ Total capital $29,333 13.17% $24,046 12.63% Total capital minimum requirement 17,820 8.00 15,233 8.00 - ---------------------------------------------------------------------------------------------------------------------------- Excess $11,513 5.17% $8,813 4.63% ============================================================================================================================ Risk-adjusted assets $222,744 $190,417 - --------------------------------------------------------------================ ================= Leverage Tier 1 capital $26,533 9.28% $21,589 9.00% Minimum leverage ratio requirement 11,438 4.00 9,596 4.00 - ---------------------------------------------------------------------------------------------------------------------------- Excess $15,095 5.28% $11,993 5.00% ============================================================================================================================ Average total assets $285,952 $239,899 - --------------------------------------------------------------================ ================= Bank - ---------------------------------------------------------------------------------------------------------------------------- Risk-based Tier 1 capital $25,389 11.40% $20,819 10.94% Tier 1 capital minimum requirement 8,907 4.00 7,614 4.00 - ---------------------------------------------------------------------------------------------------------------------------- Excess $16,482 7.40% $13,205 6.94% - ---------------------------------------------------------------------------------------------------------------------------- Total capital $28,187 12.66% $23,275 12.23% Total capital minimum requirement 17,813 8.00 15,228 8.00 - ---------------------------------------------------------------------------------------------------------------------------- Excess $10,374 4.66% $8,047 4.23% ============================================================================================================================ Risk-adjusted assets $222,669 $190,345 - --------------------------------------------------------------================ ================= Leverage Tier 1 capital $25,389 8.87% $20,819 8.67% Minimum leverage ratio requirement 11,447 4.00 9,607 4.00 - ---------------------------------------------------------------------------------------------------------------------------- Excess $13,942 4.87% $11,212 4.67% ============================================================================================================================ Average total assets $286,164 $240,163 - --------------------------------------------------------------================ =================
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA"), among other things, identifies five capital categories for insured depository institutions, (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective Federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee the bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 capital ratio of at least 4%, or 3% in some cases. Under these guidelines, the Company and the Bank were considered well capitalized at December 31, 1996 and 1995. Banking agencies have recently adopted final regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as part of the institution's regular safety and soundness examination. Banking agencies also have recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluation of a bank's capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. After gaining experience with the proposed measurement process, those banking agencies intend to propose further regulations to establish an explicit risk-based capital charge for interest rate risk. The ability of the Company to pay dividends largely depends upon the dividends paid to it by the Bank. There are legal limitations on the ability of the Bank to provide funds to the Company in the form of loans, advances or dividends. Under national banking law, without the prior approval of the Comptroller of the Currency, the Bank may not declare dividends in any calendar year that exceed the Bank's net profits for that year, as defined by statute, combined with its net retained profits, as defined, for the preceding two years. As of December 31, 1996, the Bank may initiate dividend payments without prior regulatory approval of up to $8.4 million. -----END PRIVACY-ENHANCED MESSAGE-----